Capital Flows with Debt- and Equity-Financed Investment-Equilibrium Structure and Efficiency Implications

ByAssaf Razin, Chi-Wa Yuen, Efraim Sadka

November 1, 1998

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper distinguishes between debt and equity flows in the presence of information asymmetry between the firm’s “insiders” and “outsiders” in a small open economy. It shows the inadequacy of capital investment because its scope is too narrow and the investment each firm makes is too little. An unconventional policy tool is proposed to correct the market failure: lump-sum subsidies to firms that choose to equity-finance their investments.

Subject: Capital flows, Productivity, Securities markets, Stock markets, Stocks

Keywords: debt market, firm, market value, WP

Pages:
21
Volume:
1998
DOI:
https://doi.org/10.5089/9781451857641.001
Issue:
159
Series:
Working Paper No. 1998/159
Stock No:
WPIEA1591998
ISBN:
9781451857641
ISSN:
1018-5941

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